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STRATEGY ISSUES IN SCM

There are basically three levels of strategy for most firms—corporate strategy, business unit strategy, and product-market segment strategy. As is illustrated in Figure 9.4, the primary corporate strategy is to grow the business, through market penetration, market development, new product/service development, and acquisition or merger. These are the only ways a business can grow.

Sometimes an overly ambitious growth strategy destabilizes the organization when it finds itself doing too much, too quickly, necessitating a change in corporate strategy to stabilize the firm by ceasing the growth and reclaiming control, consolidating its gains as it catches up with itself. Periodically, management recognizes that it has attempted to grow the firm in ways inconsistent with its capability or present desire, and elects then to pursue a corporate strategy of retrenchment, abandoning unsuccessful lines of business or markets. Each of these three corporate strategies—to grow, stabilize, or retrench—has very different ripple impacts on its supply chain.

Larger firms establish various strategic business units (SBUs) under a corporate umbrella. Each of these SBUs serves a unique set of products, a homogeneous set of markets, has a limited number of related technologies

Figure 9.4. Only Four Ways to Grow

Only Four Ways to Grow

with other SBUs, and is responsible for its own profitability. There are basically three kinds of business unit strategies—low cost, differentiated, or focused. Low-cost producers and low-cost providers compete on their ability to be more efficient than existing competitors, and create this barrier to market entry by potential competitors. This works well for standardized products and commodities where consumers cannot discern a distinctive, superior advantage across competitive choices they have. The differentiated strategy is used by firms who compete on the ability to offer something special and unique with their product or service, allowing them the opportunity to avoid competing solely on cost. Highly branded items, trademarked and patented items, and innovative products and services can be successfully marketed as differentiated items. A focused strategy is used by business units that zero in on a specific product-market segment, and is a niche strategy, seeking to dominate, based on a combination of differentiation and cost leadership, a particular market segment. Gerber Baby Food is an example of a focused business unit strategy. Recently, the traditional labels of low cost, differentiated, and focused strategies have been replaced in the literature by the terms operational excellence, product leadership, and customer intimate strategies, respectively, as the "new and improved" terminology.

Product-market segment strategies, found as subsets to the business unit strategies, tend to follow the description of the product life cycles. The four product-market segment strategies are build, hold, harvest, and divest. The build strategy drives and accompanies the introduction and growth period of new product and service introduction. The hold strategy accompanies the maturity stage of the product life cycle, when firms create line extensions and proliferate stock keeping units (SKUs) associated with the product category. The hold strategy might also include actions to repackage or reposition the product. The harvest strategy accompanies the late maturity stage of the product life cycle, with a decision to reduce promotional support and maximize profits while sales volume is still significant. The divest strategy recognizes that the decline stage of the product life cycle has been realized, promoting thoughtful decisions on discontinuing the product at its end of life, or to sell it off while it still has some value.

The focus and consistency of strategy is important. Picking a specific SBU strategy and sticking with it precludes confusion with internal functions and trading partners. Unfortunately, many multiple-SBU corporations rely on centralized logistics functions whose capabilities and culture are asked to support conflicting strategies, such as low cost and differentiated, simultaneously. Not much research has been conducted on strategy conflicts between the sourcing side of the firm and the fulfillment side of the firm, for example, having a low-cost purchasing strategy and a differentiated fulfillment strategy. Since customers select suppliers based on a predominant strategy consistent with their own strategy, it is likely that the consumer or last reseller in the supply chain is best positioned to set the guiding strategy for the supply chain.

Culture plays a critical role in strategy. Cultural norms, core values, and guiding principles must support the chosen strategy. Recognition and reward systems are important in supporting behaviors consistent with the chosen strategy. For example, a recognition and rewards system that does not encourage functional interdependence and collaboration will not support a product leadership or customer intimate strategy. The strategic goals and culture of the organization must be aligned to achieve success.

 
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